NHAI's first public InvIT open to retail investors likely by February

Current SEBI norms only allow retail investors to invest in InvIT where at least 80 percent of their total assets are completed and profit-generating infrastructure projects

The central government is keen to launch the National Highways Authority of India's (NHAI) first infrastructure investment trust (InvIT), in which domestic retail investors can hold units, in the next six months, several officials aware of the ongoing discussions said.

"Retail participation in InvITs has been on the rise since the SEBI (Securities and Exchange Board of India) allowed small investors to participate, and the government is keen to monetise road assets through this route," a senior government official said.

He added that discussions with the SEBI for launching the first NHAI InvIT open to retail investors are in advanced stages and the government aims to launch the InvIT by February 2024.

In order to tap into the retail investor market, the Ministry of Road Transport and Highways of India (MoRTH), NHAI, and the National Highways Infra Trust (NHIT) are considering two routes and are discussing both options with SEBI.

The options

The first option being considered is one where MoRTH, NHAI and NHIT are working with SEBI to come up with norms that allow retail investors to participate in InvITs that hold a majority of under-construction assets.

The second option is one where NHIT identifies completed and revenue-generating highway assets.

While the government is keen to allow retail participation in InvITs that hold a majority of under-construction assets, current SEBI norms only allow retail investors to invest in InvIT where at least 80 percent of their total assets are completed and profit-generating infrastructure projects.

"The main objective behind raising money from InvITs for the NHAI is to reduce its incoming debt from under-construction projects, which is why the government is trying to push for a public InvIT holding under-construction assets," an executive aware of NHAI and NHIT's asset monetisation plans said.

He added that the government has asked SEBI to consider easing norms to the extent where around 50-60 percent of the assets held in an InvIT are made up of under-construction assets.

"Discussions with the SEBI for the launching the first InvIT (holding under-construction assets) open to retail investors are at advanced stages and very soon the market regulator will come up with new norms based on international standards," the first government official said.

He added that the SEBI has recently allowed sponsors of InvITs and real estate investment trusts (REITs) to sell their units to exchange-traded funds (ETFs), which will be used to gauge the interest of retail investors in this investment class over the next few months.

"The bourses will monitor the interest level of retail investors in ETFs for the next few months, and if it is seen that retail investors are keen on these funds, the next tranche of the NHAI's InvIT will be open to retail investors," the official said.

At the moment SEBI only allows participation of retail investors in InvITs that are majorly made up of completed and revenue-generating assets.

Privately placed InvITs can invest in under-construction assets as well as completed and revenue-generating assets and public InvITs can invest majorly in completed and revenue-generating assets.

NHAI's InvITs till now have been mostly privately placed InvITs which include under-construction projects

The NHIT is currently in the process of launching its third round of asset monetisation through a privately placed InvIT.

"The third round of highway monetisation through the InvIT route will be launched by September and the fourth round will be launched by February ideally," the executive said.

He added that the NHIT aims to take possession of new road assets from the NHAI by December, by when approvals from SEBI for a public InvIT are expected.

For the fourth round of asset monetisation the NHAI has so far identified 4 highway projects, all under-construction ones, of around 250 km in length to raise around Rs 2,500 crore to Rs 3,000 crore, another executive said.

He added that more projects are expected to be added following the response from investors in the third round of fundraising.

Asset monetisation

The NHIT is currently looking to raise around Rs 7,500 crore to Rs 8,000 crore by monetising six road assets in the third round of highway monetisation.

The third NHIT round was originally slated to be launched in March but was delayed due to taxation issues.

The Union Budget for 2023-24 had proposed to tax income distributed by business trusts like REITs and InvITs in the form of debt repayments at the hands of the unitholders.

However, this was revised as the government decided to provide relief to the investors and proposed to treat distribution from business as a return of capital.

As part of the third round of asset monetisation, the NHIT has taken possession of roads including the 125.38 km-long Gwalior-Shivpuri (Madhya Pradesh), Chichira-Kharagpur (West Bengal) of length 56.12 km, and Orai-Bara (Uttar Pradesh) of length 125.806 km.

Roads in Rewa-Katni-Jabalpur-Lakhnadon (Madhya Pradesh) of length 306.337 km, Kachugaon-Rakhaldubi Bus Junction (Assam) of length 62.671 km and Rakhaldubi Bus Junction to Kaljhar (Assam) of length 51.5 km have also been given to the NHIT for monetisation.

This takes the total length of road assets that are being transferred to the NHIT to 727.814 km, whose asset monetisation process will start next month.

NHIT currently controls eight road assets with a total length of 637 km, excluding the ones mentioned above. After taking possession of the above-mentioned road assets the NHIT will control road assets of length 1,364.8 km.

NHAI InvIT

NHAI launched its InvIT in October 2021, as part of its plans to reduce market borrowing to reduce its debt and raise money from monetising road assets.

The InvIT acquired five toll road assets of 390 km, spread across Rajasthan, Gujarat, Telangana and Karnataka initially. In June last year, the NHAI offered additional three roads aggregating 247 km to its InvIT.

In the first round, money was raised largely from institutional investors, pension funds and global equity investment firms, including CPP Investments and Ontario Teachers’ Pension Fund.

In the second round, NHIT raised around Rs 3,800 crore through a follow-on market offer for institutional investors and an NCD issue, which got listed on October 28.

The push for divestment and asset monetisation can also be seen by the government's move to set the National Highways Authority of India's Internal and Extra-Budgetary Resources (IEBR) as negligible in 2023-24.

This is the second straight year that the NHAI's market borrowing has been set as negligible.

In 2022-2023, the government asked the highway developer to limit its borrowings. In the 2022-23 Budget, the government projected that NHAI’s IEBR would fall to around Rs 1 lakh crore, from Rs 65,000 crore in 2021-22.

As per the government's revised estimates, the NHAI had raised Rs 798 crore as IEBR in 2022-23.

According to the National Monetisation Pipeline, the NHAI should look to monetise around 26,700 km of assets by 2024-25.